Europe tipped for small rebound, but US-China woes remain

Traders were a little scared yesterday as the US-China trade tensions ticked higher, so stocks in Europe as well as the US finished lower.

This week we saw the US add 28 Chinese companies to the Entity List, which didn’t go down well in Beijing, and the Chinese ministry of commerce called on the US to remove sanctions on Chinse firms. The Chinese government said to ‘stay tuned’ as it was preparing its retaliation against the US.

At the start of the week, Beijing made it clear they won’t be compromising on industrial policy or government subsidies. Liu He, China’s vice premier, will be leading the next round of trade discussions, but he will not carry the ‘special envoy’ title. The US government has put visa restrictions on Chinese officials as a response to China’s treatment of the muslim community in Xinjiang. Beijing called on the US to keep out of Chinese internal affairs, which put pressure on stocks in Asia. When you add that to the mix, you can see why traders aren’t overly optimistic for the trade talks that will take place tomorrow. Its’s not a great sign that tensions are already creeping up in advance of the negotiations, but at least they are going ahead.

Continuing the theme of tough talks, the UK-EU relationship took a bit of a knock yesterday as Chancellor Merkel said that a deal is ‘overwhelmingly unlikely’. From the British side, Mr Johnson said an agreement is ‘essentially impossible’ to obtain, which added negative to the sentiment surrounding sterling. Despite the fragile talks, Ireland’s Simon Coveney, reiterated the view that Dublin and Brussels are working hard to get a deal, but it can’t be struck at any cost.

Jerome Powell said the Fed will start expanding its balance sheet soon in a bid to improve lending conditions. The central banker made it clear that ‘this is not QE’, it is about liquidity. As far as interest rates go, the US central bank is still data dependent.

Last week there were concerns about the health of the global economy, so yesterday’s mixed economic data didn’t do much to dispel those worries. German industrial orders increased by 0.3% on a monthly basis, which was much better than the 0.1% decline that traders were expecting. The July report was revised from -0.6% to -0.4%, which is a positive step too. The figures were promising, but major concerns about the German economy still exist.

In the US, headline PPI dropped to 1.4% from 1.8%, while the core reading declined from 2.3% to 2%. The core update is deemed to be a better gauge of underlying demand, so it is obvious it’s falling. If demand at the factory level is dwindling, it could be a sign that CPI will slide too, which could increase chatter the Fed should lower rates.

At 3pm (UK time) the US JOLTS update will be released, and economists are expecting 7.19 million, which would be a slight drop from the 7.21 million in July.

The Energy Information Administration update is expected to show that US oil inventories increased by 2.6 million barrels, while gasoline stockpiles are tipped to fall by 263,000 barrels.

EUR/USD – remains in the wider bearish trend, and if the negative move continues it might target 1.0800. A snap back might encounter resistance in the 1.1100 area.

GBP/USD – has been pushing lower for over two weeks, and if it holds below the 50-day moving average at 1.2254 could pave the way for 1.2000 to be retested. A move to the upside side might bring 1.2400 into play.

EUR/GBP – while it holds above the 200-day moving average at 0.8832 the outlook should remain bullish, and 0.9100 might act as resistance. A break below 0.8786, might put 0.8724 on the radar.

USD/JPY – since mid-September it has turned lower, and a break below 106.48 could pave the way for 106.00 to be retested. 108.47 might act as resistance to a positive move.

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